The Effect of Liquidity on Governance
TL;DR: In this paper, the authors demonstrate a positive effect of stock liquidity on blockholder governance, showing that stock liquidity increases the likelihood of block formation and has an unconditional positive effect on voice as well as exit.
Abstract: This paper demonstrates a positive effect of stock liquidity on blockholder governance. Liquidity increases the likelihood of block formation. Conditional upon acquiring a stake, liquidity reduces the likelihood that the blockholder governs through voice (intervention)--as shown by the lower propensity for active investment (filing Schedule 13D) than passive investment (filing Schedule 13G). The lower frequency of activism does not reflect the abandonment of governance, but governance through the alternative channel of exit (selling one's shares): A 13G filing leads to positive announcement returns and improvements in operating performance, especially in liquid firms. Moreover, taking into account the increase in block formation, liquidity has an unconditional positive effect on voice as well as exit. We use decimalization as an exogenous shock to liquidity to identify causal effects. The Author 2013. Published by Oxford University Press on behalf of The Society for Financial Studies. All rights reserved. For Permissions, please e-mail: journals.permissions@oup.com., Oxford University Press.
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TL;DR: The authors survey institutional investors to understand their role in the corporate governance of firms and find that most investors use proxy advisors and believe that the information provided by such advisors improves their own voting decisions.
Abstract: We survey institutional investors to better understand their role in the corporate governance of firms. Consistent with a number of theories, we document widespread behind-the-scenes intervention as well as governance-motivated exit. These governance mechanisms are viewed as complementary devices, with intervention typically occurring prior to a potential exit. We further find that long-term investors and investors that are less concerned about stock liquidity intervene more intensively. Finally, we find that most investors use proxy advisors and believe that the information provided by such advisors improves their own voting decisions.
971 citations
TL;DR: In this article, a difference-in-differences approach that relies on the exogenous variation in liquidity generated by regulatory changes was used to find that an increase in liquidity causes a reduction in future innovation.
Abstract: We aim to tackle the longstanding debate on whether stock liquidity enhances or impedes firm innovation This topic is of interest because innovation is crucial for firm- and national-level competitiveness and stock liquidity can be altered by financial market regulations Using a difference-in-differences approach that relies on the exogenous variation in liquidity generated by regulatory changes, we find that an increase in liquidity causes a reduction in future innovation We identify two possible mechanisms through which liquidity impedes innovation: increased exposure to hostile takeovers and higher presence of institutional investors who do not actively gather information or monitor
709 citations
TL;DR: In this paper, the authors examine whether and by which mechanisms passive investors influence firms' governance, exploiting variation in ownership by passive mutual funds associated with stock assignments to the Russell 1000 and 2000 indexes.
376 citations
TL;DR: In this paper, the authors evaluate the potential implications of these changes for managers, institutional investors, small shareholders, auditors, and other parties involved in corporate governance, and propose that the lower cost, greater liquidity, more accurate record-keeping and transparency of ownership offered by blockchains may significantly upend the balance of power among these cohorts.
Abstract: Blockchains represent a novel application of cryptography and information technology to ageold problems of financial record-keeping, and they may lead to far-reaching changes in corporate governance. During 2015 many major players in the financial industry began to invest in this new technology, and stock exchanges have proposed using blockchains as a new method for trading corporate equities and tracking their ownership. This essay evaluates the potential implications of these changes for managers, institutional investors, small shareholders, auditors, and other parties involved in corporate governance. The lower cost, greater liquidity, more accurate record-keeping, and transparency of ownership offered by blockchains may significantly upend the balance of power among these cohorts.
365 citations
TL;DR: In this article, the authors use a difference-in-differences approach that relies on the exogenous variation in liquidity generated by regulatory changes in the cost of trading stocks and find that an increase in liquidity causes a reduction in future innovation.
Abstract: We aim to tackle the longstanding debate on whether stock liquidity enhances or impedes firm innovation in this paper. This topic is of particular interest to firm stakeholders and regulators, because innovation is crucial for firm and national level competitiveness and stock liquidity can be altered by financial market regulations. We use a difference-in-differences approach that relies on the exogenous variation in liquidity generated by regulatory changes in the cost of trading stocks and find that an increase in liquidity causes a reduction in future innovation. We then identify two possible mechanisms through which liquidity impedes innovation: increased exposures to hostile takeovers and higher presence of institutional investors who do not actively gather information about firm fundamentals or monitor. Both could result in a cut in investment in innovation to boost current earnings. Our paper shows a previously under-identified adverse consequence of liquidity: its hindrance to promoting firm innovation.
363 citations
Cites background from "The Effect of Liquidity on Governan..."
...Norli, 6 Ostergaard, and Schindele (2010) show that liquidity leads to more frequent contested proxy solicitations and shareholder proposals, while Edmans, Fang, and Zur (2013) show that liquidity facilitates governance through “voice” (intervention), and to a greater degree through “exit”…...
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TL;DR: In this paper, Bhandari et al. found that the relationship between market/3 and average return is flat, even when 3 is the only explanatory variable, and when the tests allow for variation in 3 that is unrelated to size.
Abstract: Two easily measured variables, size and book-to-market equity, combine to capture the cross-sectional variation in average stock returns associated with market 3, size, leverage, book-to-market equity, and earnings-price ratios. Moreover, when the tests allow for variation in 3 that is unrelated to size, the relation between market /3 and average return is flat, even when 3 is the only explanatory variable. THE ASSET-PRICING MODEL OF Sharpe (1964), Lintner (1965), and Black (1972) has long shaped the way academics and practitioners think about average returns and risk. The central prediction of the model is that the market portfolio of invested wealth is mean-variance efficient in the sense of Markowitz (1959). The efficiency of the market portfolio implies that (a) expected returns on securities are a positive linear function of their market O3s (the slope in the regression of a security's return on the market's return), and (b) market O3s suffice to describe the cross-section of expected returns. There are several empirical contradictions of the Sharpe-Lintner-Black (SLB) model. The most prominent is the size effect of Banz (1981). He finds that market equity, ME (a stock's price times shares outstanding), adds to the explanation of the cross-section of average returns provided by market Os. Average returns on small (low ME) stocks are too high given their f estimates, and average returns on large stocks are too low. Another contradiction of the SLB model is the positive relation between leverage and average return documented by Bhandari (1988). It is plausible that leverage is associated with risk and expected return, but in the SLB model, leverage risk should be captured by market S. Bhandari finds, howev er, that leverage helps explain the cross-section of average stock returns in tests that include size (ME) as well as A. Stattman (1980) and Rosenberg, Reid, and Lanstein (1985) find that average returns on U.S. stocks are positively related to the ratio of a firm's book value of common equity, BE, to its market value, ME. Chan, Hamao, and Lakonishok (1991) find that book-to-market equity, BE/ME, also has a strong role in explaining the cross-section of average returns on Japanese stocks.
14,517 citations
9,341 citations
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TL;DR: The core methods in today's econometric toolkit are linear regression for statistical control, instrumental variables methods for the analysis of natural experiments, and differences-in-differences methods that exploit policy changes.
Abstract: The core methods in today's econometric toolkit are linear regression for statistical control, instrumental variables methods for the analysis of natural experiments, and differences-in-differences methods that exploit policy changes. In the modern experimentalist paradigm, these techniques address clear causal questions such as: Do smaller classes increase learning? Should wife batterers be arrested? How much does education raise wages? Mostly Harmless Econometrics shows how the basic tools of applied econometrics allow the data to speak. In addition to econometric essentials, Mostly Harmless Econometrics covers important new extensions--regression-discontinuity designs and quantile regression--as well as how to get standard errors right. Joshua Angrist and Jorn-Steffen Pischke explain why fancier econometric techniques are typically unnecessary and even dangerous. The applied econometric methods emphasized in this book are easy to use and relevant for many areas of contemporary social science. An irreverent review of econometric essentials A focus on tools that applied researchers use most Chapters on regression-discontinuity designs, quantile regression, and standard errors Many empirical examples A clear and concise resource with wide applications
7,192 citations
TL;DR: In this article, the authors show that expected market illiquidity positively affects ex ante stock excess return, suggesting that expected stock ex ante excess return partly represents an illiquid price premium, which complements the cross-sectional positive return-illiquidity relationship.
5,636 citations
TL;DR: In this article, the authors present the correct way to estimate the magnitude and standard errors of the interaction effect in nonlinear models, which is the same way as in this paper.
5,500 citations